Let’s talk Paypal. No longer merely a P2P player

The story of Paypal started in 1998 when Max Levchin, Peter Thiel and Luke Nosek founded Confinity, a digital wallet company. They later merged Confinity with X.com, launched by Elon Musk, and altogether rebranded the new entity as Paypal. In 2002, the company went public under the ticket $PYPL. Later in the same year oof its IPO, it was acquired by eBay and became the prominent payment option on the famous marketplace. In 2015, Paypal left the eBay family to become a separate and independent entity. Six years later, it is now one of the most trusted brands in the world, available in more than 200 countries and valued at almost $300 billion.

At the core, Paypal provides payment and financial services to both consumers and merchants. Originally, it used to be one of the primary methods of person-to-person (P2P) transactions. Over the years, Paypal has transformed itself into a more expansive platform. Consumers can now use Paypal to send and receive money from others as well as to pay merchants, whether the transactions are online or in stores with debit cards, credit cards, tap to pay and QR Codes. On the merchant side, Paypal offers a host of solutions, including payment processing, marketing tools and financing options.

Paypal's breadth of services
Figure 1 – Paypal’s services. Source: Paypal

As a two-sided platform, Paypal needs one side to feed the other. From the consumer perspective, they only find Paypal useful when they have friends and families on Paypal network. Additionally, Paypal must be accepted at various merchants, whether transactions take place in physical stores or on websites. Otherwise, what would be the point of having a Paypal account? From the merchant perspective, Paypal’s value propositions lie in their payment solution and the brand name as well as trust cultivated with consumers. If consumers didn’t trust or use Paypal, there would be plenty of other alternatives. But that’s also one of their three moats. It’s super hard to be a two-sided platform because of the chicken-and-egg problem. Not only did Paypal have to solve that problem between consumers and merchants, but they also had to deal with it within the consumer space.

Another moat of Paypal is that the company has cultivated trust in consumers and merchants alike with its track record of security. Even though security breaches are almost inevitable to any company, so far Paypal hasn’t recorded too many incidents. When it comes to handling people’s money, security should be at the top of any company’s agenda. I mean, anyone can boast that they can exercise two hours in a row. I don’t doubt it. But it’s a completely different challenge to exercise two hours a day for 30 days in a row, let alone for years. To replicate such a track record, a competitor needs to invest in security and more importantly, it needs time. No matter what a newcomer says about its own security, only time can seed the trust in the constituents of its network. Unfortunately, time isn’t something that human brains or money can buy. And while a newcomer or existing player builds up its track record, Paypal is not likely to stand still. Just look at their M&A activities in the last few years: Venmo & Braintree (2013), Xoom (2015), iZettle (2018), Honey (2019), GoPay & Happy Returns (2021).

Finally, Paypal is operating at an enormous scale. In Q1 FY2021, it processed $285 billion in transactions, growing at 49% YoY. That annualizes to more than $1 trillion. As you may know, scale is the magic in business. Paypal’s gigantic scale should give the company a cost advantage over competitors. Plus, the breadth of Paypal offerings poses a daunting challenge to anyone wishing to match them. Just look at Figure 1 to see how many services are available, not to mention the acquisition of Happy Returns. It’s hard to spread resources and make investments on multiple fronts when you are on the back foot in terms of unit costs. Just to give you an example of what the scale of Paypal’s existing active account base and its brand name can do, let’s take a look at the rollout of Buy Now Pay Later and QR Code. Paypal introduced its Buy Now Pay Later only in August 2020. As of Q1 2021, its Pay in 4 already had over $2 billion in TPV globally, of which $1 billion came from the US. Pay in 4 also had 5 million unique customers. In addition to its popularity and reach, Paypal offers the service to merchants without charge. Normally, merchants have to pay BNPL providers several times the normal interchange, but Paypal is willing to subsidize merchants to gain market share. Also, the company enabled pay by QR Code some time in the latter half of 2020, but it already amassed 1 million merchants as of Q1 2021 that used the service, up from 500,000 two quarters prior.

How Paypal benefits merchants
Figure 2 – Value propositions of Paypal to merchants. Source: Paypal

How does Paypal make money?

We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services.

We generate revenue from consumers on fees charged for foreign currency conversion, optional instant transfers from their PayPal or Venmo account to their debit card or bank account, interest and fees from our PayPal Credit products, and other miscellaneous fees.

Source: Paypal’s latest Annual Report

In short, Paypal charges merchants on every processed transaction and for other additional services. On the consumer side, P2P transactions don’t yield much revenue, but if consumers want to have instant deposits or have an outstanding unpaid balance on their credit cards with Paypal or Venmo, then the company earns additional fees and interest on the balance.

Take-rates which indicate what Paypal gets in revenue over the transaction volume depend on the kinds of transactions. Normally, bill payments and P2P transactions have low take-rates. Transactions funded using debit or credit cards are more expensive to process than those funded using bank accounts or balance within Paypal or Venmo. Commercial transactions such as those on eBay or cross-border transactions that require a foreign exchange are more lucrative. Obviously, Paypal would love to maximize revenue and profits, but there is necessarily a balancing act to be had here. Although bill payments and P2P have a low yield, they are sticky. They are what keeps users engaged and in the network. Payments is a highly contested industry. Any transactions processed by legacy banks, other providers such as Square or Apple Pay and fintechs are transactions that Paypal loses. Hence, I think for the time being, it’s better for the company’s future that they are prioritizing the growth of the active account base and engagement.

Venmo and Paypal TPV
Figure 3 – Paypal and Venmo TPV
Paypal's active account base
Figure 4 – Paypal’s active account base
Paypal and Venmo YoY Growth in TPV
Figure 5 – Paypal & Venmo YoY Growth in TPV
Transactions per active accounts from Paypal
Figure 6 – Transactions Per Account

In short, I am bullish on Paypal. The company has a brand name known and trusted in many countries around the globe. It has the expertise after spending more than two decades in the industry and the ability to transform itself into a more expansive and competitive entity. It has a nice track record of acquiring other businesses to add needed capabilities. Currently, Paypal is the only Western company with 100% ownership of a Chinese payments company after it acquired 100% stake in GoPay. Additionally, it announced the acquisition of Happy Returns with the aim of offering merchants as well as shoppers convenient return services. As payments are pretty fragmented, I believe Paypal will not have any trouble from regulators with regard to future M&A. Yes, competition is plenty and stiff, but as you may already see at this point, there are reasons to like Paypal and what they are doing.

Disclosure: I have a position on Paypal.

Review of Walt Disney’s Q2 FY2021 results

There are two main stories regarding Disney: Disney+ as well as other streaming services and their non-streaming segment.

As more and more folks in the US are vaccinated and the CDC relaxed its guidelines, Disney reopened its theme parks and resorts in the last quarter. Traditionally, this segment is the key source of Disney’s profit, but was severely hit by Covid-19. Compared to the prior year quarter, Q2 FY2021 saw revenue from Parks, Resorts, Cruise and Merchandise drop by more than 50%.

Figure 1 – Breakdown of Disney’s Q2 FY2021 Revenue – Source: Disney

Hence, having their physical attractions open is definitely good news to investors. It’s also a testament to the resiliency and health of the business. Its cash cow was hit very hard by the catastrophe that is Covid-19, yet it pivoted successfully to Direct-to-Consumer while waiting for better days to come. In addition, Disney is going to launch an all-new Avengers campus in California on June 4 and allow bookings for its new cruise ship Disney Wish starting May 27th. The Avengers campus, I suspect, will be a big hit to consumers. Thousands, if not millions, love the 10 year story arc with about 23 Marvel movies. As the original cast such as Chris Evans or Robert Downey Jr is more or less out of the picture and the new generation of superheroes are slowly making their way to the scene, fans will cherish a chance to connect physically with their old and new heroes. That’s the power of Disney. They invest a lot of money in creating content and then luring consumers to visit their parks, resorts, cruise lines and buy merchandise. While other streamers can compete with this company on the content front, few, if not none, have the capability and resources to replicate what Disney has on the other part of the equation.

Disney’s Streaming Services

Because Disney+ is touted as the company’s single most important priority, all attention is fixated on the health of the service. At the end of Q2 FY2021, Disney+ has almost 104 million paid subscribers, up from 95 million in the previous quarter. The net add of 8.7 million paid subscribers is much lower than what Disney added in the previous three quarters during Covid. The executives blamed the following for the smaller add:

  • Covid pulled forward subscribers
  • A price increase in two main markets: EMEA and North America
  • No new market launch. The launch of STAR+ in Latin America is postponed to the end of August to leverage major sports events such as the new season of Premier League, La Liga & Copa Libertadores
  • A disrupted schedule of Indian Premier League, India’s national cricket league

On the earnings call, the company reaffirmed its target of 240-260 million paid subscribers on Disney+ at the end of fiscal year 2024. To meet the lower end of that target, by my calculation, Disney needs to have a net add of about 12.5 million subscribers every quarter between now and Q4 FY2024. As you can see above, there are quite a lot of factors that can affect the number of subscribers, but if I have to make a bet, I’ll say that they can do it. There are two reasons. The first one is that Disney+ right now is only available in 31 countries. It’s not even live yet in Asian or LATAM countries where there are a lot of folks. My country alone has 96 million people and 50% of those are between 18 and 54 years of age. There are a lot of spots on the world map where Disney+ can expand its presence. The second reason is that the company lowballed their subscriber target before. It’s likely that they may be doing it again with the current one.

The main criticism of Disney’s current growth strategy is that it relies too much on the low ARPU market in India. Hotstar makes up 1/3 of Disney+ total subscriber base, up from 25% two quarters ago. The low price in India suppressed ARPU of Disney+ from $5.61, excluding Hotstar, to just $3.99, including Hotstar. While ARPU is obviously an important part of a streaming business, it’s equally important to take into account where Disney+ is at the moment. Fans of Netflix usually cite its scale as the main competitive advantage. In other words, Netflix has a cost advantage because it can spread content expenses over many more subscribers (around 200+ million). To negate that advantage of Netflix, Disney+ has to grow its base, but it would need a magic wand to acquire more users and grow ARPU because that’d be virtually impossible.

Disney subscribers, net adds and ARPU
Figure 2 – Disney’s Subscribers, Net Adds and ARPU

Any comparison between Netflix and Disney+ at this stage is very challenging. First of all, Netflix is available in 190+ countries whereas Disney+ is only in 31. When Netflix started, the category didn’t exist and it had to be a trailblazer. But it also means that Netflix didn’t have a fierce competitor like its current version nowadays. Any price it set was essentially the best price at the moment. On the other hand, while Disney+ doesn’t have to create a whole new market like Netflix did, it has to compete against an established and experienced rival that has a major cost advantage. There is a vicious cycle at play here. Netflix’s competitors have a cost disadvantage because they have a smaller scale. The longer that disadvantage persists, the hard it is to plow billions of dollars a year into content. Without content, there wouldn’t be any subscribers, hence, Netflix’s advantage is reaffirmed. As a result, the likes of Disney+ have to prioritize scale over ARPU for the time being, to avoid being sucked into that vicious cycle. Another difficulty lies in the different operating models. Netflix’s content is rarely available in theaters. Its content library is available to all subscribers without restrictions. Meanwhile, Disney+ releases its content in different fashion:

  • Exclusively available to all subscribers without additional charge
  • Exclusively available to subscribers with Premier Access (about $30 per title) for a few weeks before being widely available to all
  • Available first in theaters for a period of time (45 to 90 days) before going to Disney+

The variety in the release strategy may affect the user acquisition to Disney+, compared to Netflix, but who is to say that it doesn’t help Disney generate more money or profit from taking a different path? Disney+ tried the Premier Access with Wulan and a couple of movies afterwards. I reckon that it must have yielded some success so that they decide to keep it moving forward. With an exclusive theater period, Disney is trying to see if the high margin revenue from theater owners are worth suppressing the subscriber base on its flagship streamer. Whether the flexible model employed by the iconic brand or the dedicated philosophy of Netflix will prevail remains to be seen.

Besides Disney+, I am excited about ESPN+. The service has been growing very nicely in terms of subscriber count and ARPU. At 13.8 million subscribers, there is still a lot of upside within the US to go. For sports fans, its content library is very appealing with Serie A, Bundesliga, UFC, Australian Open, US Open, Wimbledon, MLS & College Basketball. The new deals with Major League Baseball to stream 30 games per season till 2028 and with La Liga in an 8-year deal to stream 300+ matches per year in both English and Spanish will absolutely make it more attractive. Since streaming rights need to be negotiated for every geography, it remains to be seen how or if Disney is able to grow ESPN+ out of the US.

You may be ripped off on Amazon. Do yourself a favor and check other retailers’ prices

I noticed that there were a few products that were much more expensive on Amazon than from other retailers. Take Choc Zero chocolate and hazelnut spread as an example. This is a product I really like because 1/ it’s chocolate and 2/ it’s keto. While a 12oz jar is sold for $9 on Choc Zero’s website, you’ll have to pay $20.81 for the same jar on Amazon, whether you have a Prime membership or not. Sure enough, with Prime, you don’t have to meet a minimum order requirement from the manufacturer itself, but after including the shipping fee of $5 from Choc Zero, the whole order will still be much cheaper than what is available on Amazon.

A 12oz jar of Keto Chocolate Hazel Nut Spread
Figure 1 – A 12oz jar of Keto Chocolate Hazel Nut Spread on Choc Zero’s website. Source: Choc Zero
Figure 2 – The same jar on Amazon. Source: Amazon

Another product that has the same issue is Fromm Tunachovy Cat Dry Food. A 5lb bag of Fromm Tunachovy Grain Free Salmon Dry Food costs around $20-$21 at normal retailers. The same product is running at $35.49 on Amazon with or without Prime.

Fromm Tunachovy Cat Dry Food at retailers
Figure 3 – A 5lb bag of Fromm Tunachovy Cat Dry Food costs around $21 at retailers
Fromm Tunachovy Salmon Cat Dry Food on Amazon
Figure 4 – The same bag costs $35.5 on Amazon. Source: Amazon

The difference in price likely results from multiple fees and commissions that retailers have to pay for the privilege of being on Amazon. To keep the same margin, retailers have no option but to raise prices. However, increased prices make their products look less competitive and friendly to consumers. How many consumers wanted to buy the two products above on Amazon but abandoned the plan because they look too pricey? I mean, how many are not deterred by a jar of chocolate spread costing $20? I sure was. Much as I like the convenience of shopping with Amazon, I’d rather buy more in quantity than what I actually need at the moment to save me quite a bit of money.

The lesson here is that: check the prices of what you are about to buy with other retailers before hitting that “Order” button on Amazon.

App Tracking Transparency; Apple’s Advertising Business

In this post, I’ll talk about App Tracking Transparency (ATT), how Apple is different from Facebook and how Apple’s own advertising business is seemingly exempted from it

What is App Tracking Transparency?

Starting iOS14.5, apps have to ask explicit consent from users if they want to track users across different apps and websites. At the heart of the matter is whether advertising platforms such as Facebook should have automatic access to Apple users’ Identifiers for Advertisers (IDFA). IDFA is a unique identifier for your device. It is to your device what Social Security Number is to you personally. Traditionally, the likes of Facebook did have access to IDFA by default. Users had to opt out of cross-app tracking. Facebook used IDFA to deliver personalized ads. For instance, after learning that you just bought some sporting gears from Scheels, they could serve you ads for sporting equipment from other retailers. Also, IDFA helped Facebook measure the effectiveness of their ads. If you get served an ads from a chocolate brand and proceed to actually buy some from it, Facebook can tell the brand that their ads helped convert you into a buyer.

With the introduction of App Tracking Transparency (ATT), access to IDFA by default was severed. Developers now have to seek explicit consent from users whenever they want to regain such access. In a popup, developers can tailor their message to users and make their case as to why allowing tracking is to the users’ benefit.

Source: Apple

How Apple and Facebook differ in their approach to advertising

Before we proceed, let’s take a moment to talk about how Apple defines tracking. Here is Apple:

Tracking refers to the act of linking user or device data collected from your app with user or device data collected from other companies’ apps, websites, or offline properties for targeted advertising or advertising measurement purposes. Tracking also refers to sharing user or device data with data brokers.

Examples of tracking include, but are not limited to:

– Displaying targeted advertisements in your app based on user data collected from apps and websites owned by other companies.

– Sharing device location data or email lists with a data broker.

– Sharing a list of emails, advertising IDs, or other IDs with a third-party advertising network that uses that information to retarget those users in other developers’ apps or to find similar users.

– Placing a third-party SDK in your app that combines user data from your app with user data from other developers’ apps to target advertising or measure advertising efficiency, even if you don’t use the SDK for these purposes. For example, using an analytics SDK that repurposes the data it collects from your app to enable targeted advertising in other developers’ apps.

The following use cases are not considered tracking, and do not require user permission through the AppTrackingTransparency framework:

– When user or device data from your app is linked to third-party data solely on the user’s device and is not sent off the device in a way that can identify the user or device.

– When the data broker with whom you share data uses the data solely for fraud detection, fraud prevention, or security purposes. For example, using a data broker solely to prevent credit card fraud.

– When the data broker is a consumer reporting agency and the data is shared with them for purposes of (1) reporting on a consumer’s creditworthiness, or (2) obtaining information on a consumer’s creditworthiness for the specific purpose of making a credit determination.

Source: Apple

Long story short, Apple allows that an app can track you within its property and your data doesn’t leave your phone. It’s also not tracking if the data sharing is for an official purpose that is not ads-serving. Think about it this way. When you walk into a Walmart and walk around the aisles, the cameras inside the store can tell Walmart what you like and what you don’t. I rarely venture into a Walmart’s candy or cheese aisle. I am fine with Walmart knowing it because the store is their property and I have a direct relationship with them whenever I shop there. However, it would be not OK if Walmart struck a deal with Starbucks that allows the two companies to share my shopping behavior in their stores with each other without my consent. It would be really creepy.

The same goes for our data on mobile device. Facebook can serve us ads based on our behavior on their properties, including the big blue app, Messenger, Instagram or Whatsapp. To Apple, that’s possible and allowed. However, it is no longer allowed that Facebook follows users across websites & apps, and uses such knowledge to serve ads without our consent. A permission has to be granted first.

Shortly after the introduction of ATT, Apple debuted their Apple Search Ads. Apple Search Ads enables developers to serve users ads on the Search Tab of the App Store. According to the company, 70% of App Store users used the Search tab to find apps and 65% of searches result in downloads. Hence, it’s a valuable real estate to both Apple and developers. To enable targeted ads, Apple groups customers into segments based on data that they retrieve from:

  • Apple ID: name, age, location, gender, or anything that you list on your Apple ID
  • Device information: language setting, device type, OS version, mobile carrier
  • Apple News & Stocks: topics and categories that you interact with
  • App Store: searches on the App Store. Downloads from the App Store and in-app purchases are only allowed when the targeting is done by the app’s developer. Said another way, the fact that you downloaded Call of Duty and the stuff you bought inside the app can only be used for targeting by Call of Duty itself, not somebody else

Apple has received a lot of criticisms since the introduction of Apple Search Ads. Some critics say that Apple has a double standard for its own advertising business because there is no popup to ask for users’ permission with Apple Search Ads. The criticism is misguided in my opinion. The reason why there is no permission seeking from Apple is that the company uses only first-party data (data that users already give Apple and data that is created & gathered on Apple’s apps) for targeting. It doesn’t use data gathered on other apps to serve you ads on the App Store. Based on how Apple defines tracking as I laid out above, it is not tracking. In fact, Apple’s definition of tracking is similar to that of World Wide Web:

Tracking is the collection of data regarding a particular user’s activity across multiple distinct contexts and the retention, use, or sharing of data derived from that activity outside the context in which it occurred. A context is a set of resources that are controlled by the same party or jointly controlled by a set of parties.

Source: World Wide Web

In the case of Facebook, it wants to get users’ data OUTSIDE its property apps for targeting. With ATT, Apple wants their rival to at least ask us, the users, for permission to use our own data. To Facebook, it’s unfortunately a bridge too far. I mean, I am not naive enough to think that financial benefits aren’t in Apple’s calculations when they plan out ATT and Search Ads. The difference here is that while Facebook makes money at the expense of user privacy, Apple found a way to generate more revenue and still honor our privacy. Other critics say that Apple creates its own advantage because, with ATT and the new Search Ads, Apple is likely the only party that can track app download conversion. It is true that Apple will likely be the only advertiser that can tell developers whether their ads are effective. But does Apple have a duty to allow Facebook to track users and know the conversion from the App Store in the first place? If a native Facebook shop that lives entirely on Facebook runs a Google ads to get people to come to the store and make purchases, will Facebook let Google know whether and when a purchase is made? I don’t think so. Hence, why does Facebook want something from others that it doesn’t want to do in the first place? Plus, whether we download an app is our data. Why should Facebook’s desire to know that be put above our privacy? It’s a weird criticism, if you ask me.

In short, Apple has been a company with a perspective and excellent, like wealthiest-in-the world excellent, at making money with their products and services true to that perspective. In this case, Apple thinks it can deliver targeted ads while respecting users’ privacy and making, I assume, a great deal of money in the process. If there is anything I think Apple could have done better, it’s the communication and the timing of ATT and Apple Search Ads. But overall, I think I agree with this Twitter user

Disclosure: I have a position on both Facebook and Apple (I know, I know)

Uber’s Delivery is on fire. Driver dispute cost $600 million, but may be a blessing for the business

Uber is well on track to a full recovery. Delivery continues to be the bright spot

Yesterday, Uber released their financial results for Q1 FY2021. In general, the overall business mostly recovered from the impact of the pandemic. Even though it made fewer trips and less revenue than last year, gross bookings rose by 24%. Mobility Gross Bookings continued to be down year over year as countries are still battling Covid-19. On the other hand, Delivery Gross Bookings increased by 166%, up to $12.5 billion from $4.7 billion a year ago, due to strong demand. To put it in perspective, Uber generated almost as much Gross Bookings in Delivery in Q1 2021 as it did in the entire year of 2019.

Uber's Mobility and Delivery Gross Bookings
Figure 1 – Uber’s Mobility & Delivery Gross Bookings

In Q1 2021, the company’s adjusted EBITDA was -$360 million, but it was up from the loss of $612 million a year ago. Mobility was still profitable, albeit down 49% YoY. Delivery and Freight remained loss-makers, but the loss narrowed compared to Q1 2020. According to Uber, Delivery was profitable on the adjusted EBITDA basis in 12 markets in Q1 2021. Take rates for Mobility and Delivery were 12.6% and 14%, respectively. Mobility’s take-rate dropped from their usual 20% range because Uber took a draw-down of $600 million for driver expenses following the High Court’s verdict in the UK that would force Uber to classify drivers as employees. Without the draw-down, Mobility take rate would be 21.5%. Delivery’s take rate has been steadily increasing since Q4 2019. As the platform continues to grow in scale and fine-tune its operations for higher efficiency, I expect to see Delivery take rate to hover around the 14-15% range.

Uber's Mobility & Delivery Take Rates
Figure 12- Uber’s Mobility & Delivery Take Rates

Driver-friendly regulations can be both a threat and a blessing for Uber

This is the first time that investors could, to some extent, quantify the impact of regulatory threats on Uber’s business. Yesterday, the Biden administration rescinded the previous administration’s rule which would have made it more difficult for drivers to be considered employees. The Secretary of Labor also mentioned that drivers should be treated as employees with benefits instead of just contractors, but stopped short of announcing a concrete policy change. That’s why Uber’s executives repeatedly emphasized that they would engage in dialogues with the federal government moving forward to find an agreeable solution and that it’s not doom and gloom yet for their business.

Some are justified in their pessimism for Uber. A driver-friendly regulation would definitely hurt Uber’s bottom line in the short term. In the long run, I am not so sure. Any new regulation regarding gig workers would affect not only Uber, but also and more importantly its smaller rivals. Every company from Lyft, Instacart, Doordash to Gopuff will have to pay more personnel expenses. But few of them have the scale and resources that Uber does. Take Lyft as an example. It operates in Canada and the US only and doesn’t have a Delivery service like Uber, at least not yet. As a result, it would have a higher driver expense per order than Uber because the latter could stretch the fixed expense over many more Ride/Order. That’s a unit economics advantage that comes with operating in more markets, more verticals and at a higher scale.

Figure 3 – Uber’s Outside Equity

Plus, if Uber decided to pay drivers more than others, it could lock in drivers exclusively on its platform and create a driver supply problem for its smaller rivals. Fewer drivers mean slower services. Slower services lead to less satisfied customers. Less satisfied customers result in less business. That’s the vicious cycle that Uber could inflict on its smaller rivals. Plus, Uber has about $13 billion in equity in the likes of Grab, Aurora or Didi. If push comes to shove, it can sell off all of it to finance its operations, something that I doubt other delivery services can do.

Other positive developments

Uber mentioned that its Delivery would debut soon in Germany. Germany is arguably the biggest consumer market in Europe and it doesn’t make sense to not have one of its main business lines in the country. As a new market, Uber may have to take a loss in the short run to establish its presence, among local competitors. Since the CEO took over, Uber has scaled back operations in areas where it didn’t believe it had competitive advantages. If they decide to launch in Germany, there may be a good reason.

This may be the first time I remember that Uber specifically called out its advertising business. While it’s not really surprising, it has plenty of potential. As a household name that has millions of users on its platform, Uber is an attractive partner to merchants. Hence, it makes sense Uber wants to monetize its valuable real estate on its app. Advertising is a higher margin business and should help Uber with its profitability goal.

Additionally, the company also mentioned that its New Verticals (grocery, alcohol and convenient items) reached an annualized Gross Bookings of $3 billion in March. The revelation contained some caveats such as: what does “annualized” mean? What is the distribution of such Gross Bookings between grocery, alcohol and convenient items? Nonetheless, with the acquisitions of Drizly, Postmates and the partnership with Gopuff, it’s a vertical to watch out for in the future.

Uber & GoPuff. Amazon streams NFL games on Prime Video in 2022

Uber boosts its grocery delivery with GoPuff

Per Bloomberg:

Uber Technologies Inc. will vastly expand grocery delivery in the U.S. this summer through a partnership with GoPuff, a fast-growing delivery startup and the owner of the liquor store chain BevMo!, the companies plan to announce Tuesday.

GoPuff will make inventory of convenience store and grocery items available to Uber customers in 95 cities starting next month and nationwide by the end of the summer, the companies said. GoPuff will handle logistics and delivery for the orders, and Uber will take a percentage of each transaction made through its app.

GoPuff, which was founded in 2013, is a delivery startup that focuses on “essential items” such as snacks, pet products, beauty products or liquor. The model on which GoPuff operates is a bit different from other delivery services. Instead of having their drivers pick up items from the stores, GoPuff distributes orders from their micro-fulfillment centers strategically located in markets across the US. According to the startup, it is now operating 250+ fulfillment centers and serving more than 650 cities.

In terms of unit economics, every order on GoPuff has to be at least $10.95. The company charges users a flat delivery fee of $1.95 for every order and claims that there is no surge price. For orders that contain alcohol, there is an additional $2 to cover extra efforts to verify identifications and meet legal compliance. To avoid the flat delivery fee, users can enroll in their rewards program called GoPuff Fam for $5.95/month.

By partnering with Uber, GoPuff is hoping to use Uber’s popularity to drive more traffic and business. Once orders and revenue increase, it will make other aspects of the business easier to manage such as acquiring drivers or pleasing investors. The risk here is that the startup is sharing the customer relationship to Uber. Handling the delivery of every order from this partnership, GoPuff still interacts with the end customers. Nonetheless, at the top of the funnel, customers will still place orders within Uber. Plus, a portion of the sales goes to Uber for the privilege to be in their app. I really hope that GoPuff will structure the deal that enables them to have a marketing communication customers at the end of every order such as a coupon or discount for direct orders.

For Uber, this partnership will boost their Delivery service. While Covid-19 has (still) greatly damaged Uber’s Mobility business, it has been a game changer for the company’s Delivery business (UberEats). In Q4 FY2020, Delivery generated more than $10 billion in Gross Bookings, up from $4.7 billion just a year before. The acquisition of Drizly and Postmates highlights the importance of Delivery to Uber and the company’s ambition to be a Superapp.

The partnership with GoPuff gives Uber extra bodies. Even with drivers under the startup’s brand, Uber can still satisfy their customers with properly filled orders. But I think this partnership may be an audition or a test for what may come next. I won’t be surprised if Uber makes an offer to acquire GoPuff. There will be a lot of synergies in case of an acquisition: similarity in services, savings in marketing and personnel. More importantly, in GoPuff, Uber would acquire a network of micro-fulfillment centers and a new delivery model.

Excited to see what comes next from this partnership and space.

With 15 NFL games a year starting 2022, Amazon is making Prime Video a strategic advantage

Per WSJ

Amazon will take over exclusive video rights for “Thursday Night Football” starting in the 2022-23 season, a year earlier than anticipated, the company and the National Football League said Monday. Initially, Amazon’s deal with the NFL called for the tech giant to begin streaming games in the 2023-24 season. Current rights holder Fox Corp. agreed to exit its existing deal for the package a season early.

Terms, including the cost of acquiring the additional year of rights, weren’t disclosed. In March, Amazon signed a 10-year deal with the NFL to stream 15 games per season on its Prime Video platform. The average annual rights fee is around $1.2 billion and that is the price tag for the additional season, people familiar with the matter said.

At $1.2 billion for 15 games a year, that works out to $80 million per game. A significant price tag. But Amazon can afford to pay it. Not because of their financial strength, but also because of their Prime base. In the latest earnings call, Amazon revealed that there were 200 million Prime members, 170 million of which watched Prime Video in the past year. American football is very popular in the US, but is not everyone’s cup of tea. Let’s say if only about 20 million US subscribers watch NFL games on Prime Video, the content cost will sit around $4 per member per game. If 40 million US subscribers (12.5% of US population, not a wild guess), the content cost will go down to $2 per member per game. The more people Amazon can get to watch games, the lower that number will be. The scale of their Prime base makes Amazon one of a handful of companies in the US that can afford to invest that much in NFL games. Also, this benefit doesn’t include additional new Prime members that are on the fence and decide to subscribe to the service because of the NFL games.

Yes. Just in terms of strategy, I think there’s probably nothing new or surprising, but just to reiterate it, we look at Prime Video as a component of the broader Prime membership and making sure it’s driving adoption and retention as it is. It’s a significant acquisition channel in Prime countries. And that we look at it and see that members who watch video have higher free trial conversion rates, higher renewal rates, higher overall engagement. And there’s great examples of places like Brazil, where you launch a video-only subscription, for example, that preceded the broader Prime membership with shipping components, and that was, as an example, a great way to expose people to Amazon.

By Dave Fildes, Amazon’s Director of Investor Relations in Q1 FY2021 Earnings Call

As an end user myself since 2017, Prime Video has gotten so much better over the last few years with a bigger content library and more originals that I actually enjoy such as Jack Ryan or sports documentaries. My friends, both in the US and Germany, also have good things to say about the service. It’s no longer a peripheral service. As Dave Fildes said, it is an important component of the Prime membership to acquire and retain customers. In the fight against Walmart and their membership program Walmart+, Prime Video will prove a key advantage for Amazon. Walmart may be able to match Amazon in a lot of things, but it doesn’t have yet an equivalent to Prime Video. Plus, it’s not cheap for Walmart to catch up with its rival. Amazon spent $3 billion in video and music content alone in Q1 FY2021, up from $2.4 billion a year ago. That’s an annualized $12 billion in content, putting it up there among the biggest spenders. If Walmart wants to enrich Walmart+ and offers an equivalent to Prime Video, they are looking at a very expensive game. Even with an increase in content and shipping costs, Amazon has still generated more than $25 billion in Free Cash Flow Trailing Twelve Months in the last four quarters. As their other businesses grow and continue to pump cash into their coffer, we may see Amazon spend $20 billion a year in video and music very soon.

Amazon's Free Cash Flow Trailing Twelve Months
Amazon’s FCF TTM

Disclaimer: I have a position on Amazon, Walmart and Uber

The Amaz(on)-ing story continues

A few days ago, Amazon released the results of their Q1 FY2021 and did not disappoint. You can find their results here. Below are some of my takeaways and charts for illustration purposes

A growing giant

This is the first quarter where Amazon’s average 4-quarter rolling net sales exceeded $100 billion. Think about the scale for a month. In other words, for the past 365 days, Amazon generated more than $1 billion per day on average. What’s more impressive is that their YoY growth has been on an upward trajectory for the past few quarters, hitting 44% in the recently reported one. That’s the kind of growth you often see at companies at a much smaller scale, not a company that is well on track to produce half a trillion dollars in sales a year.

Amazon's YoY growth in revenue

I don’t know where their next growth will come from and that may be the scary thing about this behemoth

Among the three main segments, North America is the biggest in net sales, almost double the combined figures from AWS and International. Bewilderingly, it has been growing at a higher clip than AWS in the past four quarters, lacking behind International, whose YoY growth just hit an astounding 60% in this quarter. If you look at the segments’ size, their growth figures and growth trajectory, it’s not straightforward to say which one will drive Amazon’s growth in the future. If Amazon can crack the Grocery and Last-Mile code in the US, it will be huge for their North America numbers. In terms of International, there is still a lot more to gain. Take Vietnam as an example. My country’s retail market is huge and growing fast. Yet, there is no such equivalent of Amazon. There are indeed big players such as Shopee, Tiki or Lazada, but they are eCommerce players and the breadth of their offerings isn’t as extensive as what Amazon can offer. Plus, if you ever try the apps of these companies, you’ll chuckle and say to yourself: if somebody can offer a better shopping experience, there is a lot of money to be made here. Lastly, global companies are going through digital transformation, a trend that is accelerated by Covid. It’ll be a boon to AWS’ business.

There are bull cases to make for each of these segments. I honestly cannot tell where the next growth will come from. Not because there isn’t. But because there are more than one obvious answer. For good measure, all three are now profitable. International used to be the black sheep, but it has been profitable for the past four quarters.

Amazon's North America, International and AWS YoY growth in revenue

Amazon's North America, International and AWS 4-quarter revenue rolling average
Amazon's North America, International and AWS Operating Margin

Advertising and 3rd party are growing fast, but don’t sleep on physical stores

Among the business lines, 3rd party and advertising, both high-margin, were the fastest growing with the former growing at 64% YoY and the latter at 70% in this quarter. At $80 billion annual run-rate, 3rd party is highly impressive, growing at 64% YoY. Amazon doesn’t break down 3rd party for domestic and international markets, but it’s not strange to think that as Amazon gains foothold in more overseas markets, more merchants will want to get on the platform. Meanwhile, advertising almost reaches a run rate of $25 billion, growing 4x in the last 3 years. Impressive as it is, there is still plenty of room to grow, both domestically and internationally. As Amazon’s online stores attract millions of buyers, advertisers will be interested in promoting their products or services on a platform where the intention to buy is high.

Amazon's business lines' revenue growth

Even though physical stores’ growth doesn’t look particularly great, don’t sleep on them. Physical stores were first reported by Amazon in 2017. They are relatively new and I consider them strategic investments from the company. Amazon will not be able to compete with Walmart in groceries’ scale and the network of stores as well as fulfillment centers across the country. Hence, they will likely use technology and efficiency in delivery as competitive advantages. Hard to pull off, cashierless stores will save Amazon on personnel costs and provide a differentiated shopping experience for customers. They may also play a role in Amazon’s network of middle and last mile delivery. Eventually, customers may still receive cheaper groceries from Walmart, but some may be more interested in a different shopping experience and expedited delivery from Amazon.

In the United States, we’re delivering out of our Whole Foods stores, and we’ve engaged — we’ll be allowed to pick up a greater expansion of pickup at Whole Foods stores. Amazon Fresh became a free Prime benefit, as you know, in the late part of 2019. And customers really adopted it and continue to see strong growth. So I think on the fresh stores, it’s a little too early. The stores themselves, we’re confident that the Just Walk Out technology that will be a boon, a benefit to customers.

Source: Amazon’s CFO from Q1 FY 2021 Earnings Call

Get to know Olo – that SaaS company with eCommerce solutions for restaurants

If you haven’t heard of Olo before, but want to know about it, grab a drink and read on.

What is the company about? What does it do?

In 2005, Noah Glass founded Gomobo to let consumers order food in advance with just a text message. Apparently, he convinced an investor to shell out half a million dollars for his startup idea and relinquished his chance to get into Harvard Business School in the process. Five years later, in 2010, he took a fateful decision to pivot the business from being a forefront customer facing application to a B2B one working behind the scenes to help restaurant manage their online orders. He named the new identity Olo, which is an abbreviation of “Online Ordering”. More than a decade later, Olo went public in March 2021 at a valuation of $3.6 billion, after raising a modest $100 million from outside investors in its history.

Olo products include Ordering, Rails and Dispatch. Ordering is the company’s flagship module that enables restaurants to quickly establish its online presence, manage online orders and seamlessly handle integration with internal systems such as rewards or Point-Of-Sale (POS). If a restaurant has each of its infrastructure elements (website, mobile app, reporting tool, payment processor, rewards and POS) developed by a different vendor, it’ll be a pain to get these inconsistent fragmented systems to talk to one another. Worse, the fragmentation makes combining data to produce a holistic view of the business a time-consuming endeavor. In this day and age, operating blind without data is similar to walking in to a gun fight with a screwdriver. Ordering’s value proposition is that it can help restaurants have a single source of truth, build an integrated infrastructure and do all of the following in one simple tool: manage online orders, offer customers a nice online experience, run reports, make informed and timely decisions or manage menus.

Additionally, Rails helps restaurants manage and centralize orders as well as menus on different platforms. Restaurants partner with aggregators such as DoorDash or UberEats to leverage its marketing and delivery prowess. However, there are a couple of challenges involved in this kind of partnership. If restaurants update menus once a month, how much time is usually lost in ensuring the new changes are reflected properly on each of the aggregators’ apps? When orders from these aggregators come in, how easy is it to combine the order data with a restaurant’s own data? The idea behind Rails is that it is a one-stop shop where menus are up-to-date on all contact points and orders are centralized.

And finally Dispatch. As you can tell from the name of the module, it deals with the delivery aspect of a restaurant’s operation. This module allows restaurants to incorporate delivery into the order process right from their website or mobile app.

How does it make money? How has the company performed financially?

Olo makes money through subscriptions and transactions that it processes. Every Olo customer has to be an Ordering subscriber, paying the company a monthly fee for access to its foundational and flagship module. A typical Ordering subscription contract usually runs for 3 years, even though restaurant operators can cancel it with a 90-day notice. In addition, it’s up to restaurants to add Rails and Dispatch or not. Unlike Ordering, the other two modules are on a transaction basis, meaning that the more transactions a restaurant processes through Rails and Dispatch, the more revenue Olo makes. As the transaction volume grows, restaurants have to pay a higher Ordering subscription fee to enable the excess in transactions. Plus, aggregators have to also compensate Olo for the luxury of working with its customers.

As of December 31, 2020, Olo’s customer portfolio featured almost 400 names and more than 64,000 active locations. The company recorded $98.4 million in revenue, up from $50.7 million in 2019 and $31.8 million in 2018. Covid-19 was a big boon to Olo’s business as restaurants were forced to go online. Its gross profit ballooned from the high 60%s in 2018 and 2019 to 81% in 2020. After running in the red for the previous two years, Olo became operationally profitable in 2020 with $16 million in operating income.

Olo's Income Statement
Figure 1 – Olo’s Income Statement. Source: Olo

In its S-1, Olo offered a few data points to show the stickiness and growth of its business. For the last three years, its Net Dollar Retention Rate was higher than 120% every year. This number means that Olo extracts more revenue from existing customers from this year than the previous. In 2020, transaction revenue made up 43.3% of platform turnover, up from 6% only just two years ago. It is a reflection of the exponential growth in Gross Merchandise Value from $2 billion in 2018 to $14.6 billion in 2020. Because of that eye-popping expansion in GMV, Olo handles on average 2 million orders per day. For a company that focuses only on the US and the restaurant industry, I’ll say it’s not too shabby. While 44% of Olo’s customer base used all three modules in 2019, the figure shot up to 71% a year later. These numbers show that its ecosystem is growing and sees more buy-in from customers.

Why restaurants choose Olo?

Covid-19 made consumers more accustomed to ordering food online. Even when this pandemic blows over and diners go back to physical restaurants, the popularity as well as marketing power of apps such as DoorDash or UberEats will keep food online orders alive. Operating in an intensely competitive field, restaurants cannot afford to stay completely offline, but it can be daunting and time-consuming to set up a digital presence. Olo addresses the infrastructure pain points for operators by offering turnkey solutions that both lower the initial investments and shorten the development time.

Plus, Olo also offers values by integrating different systems into a one-stop shop. Instead of juggling from one system to the next, operators can carry out fundamental and essential tasks on one Ordering dashboard. That lowers operational stress and brings improved efficiency which, in turn, means an increase in margin. And in the cut-throat restaurant business, every percentage point in margin counts.

Another value proposition from Olo is that it allows operators to maintain direct relationship with customers. Aggregators bring visibility, sales and delivery capability to restaurants, but they also take away the direct relationship with the end users. A Doordash customer that wants to make a Five Guys order, does so from the Doordash app, not from Five Guys website or mobile app. The customer relationship here exists belongs to Doordash and in business, who owns the connection with customers wields power (just look at Amazon or Apple to understand this point).

With Olo, restaurants have a chance to own the customer relationship while still being able to work with delivery partners like Doordash or UberEats. When a restaurant uses Rails and Dispatch to handle delivery, the business process will be as follows: a customer will go to the restaurant’s branded website or mobile app to make an order. The customer will be informed of the delivery details and make a payment. In the backend, Olo collaborates with a delivery partner to work out the delivery. The merchant receives the payment, owns the relationship with the customer and only has to pay Olo for its cut. Olo, in turn, reimburses the delivery partner accordingly.

Olo's Dispatch Payment Flow
Figure 2 – Dispatch Payment Flow. Source: Olo
Figure 3 – Deliver partners own the relationship
Figure 4 – Merchants own the customer relationship

While Olo does have a lot to offer to restaurant merchants, it remains to be seen whether the actual net benefit is positive. After all said and done, do merchants benefit financially by working with Olo, net all the fees? As Olo gains more bargaining power over merchants, will they raise the subscription and transaction fees?

Moving forward, Olo has some tailwinds behind its sail. With an existing customer base of 400, there is a lot of market share out there to gain in the future. Moreover, as the company’s operation is currently in the US only, an international expansion, while having its risks, can significantly expand its TAM. It’s also worth noting that Olo has positive free cash flow and no outstanding debt; which is a good position to be in if it wishes to make hefty investments.

With that being said, Olo has some fierce competitors in Chow Now, Wix, Square, just to name a few. The likes of UberEats and Doordash are at best “frenemies”, especially the latter. As of December 31, 2020, DoorDash made up 19.3% of Olo’s total revenue and essentially made up the entire Rails segment. But the two companies were recently embroiled in a lawsuit in which Doordash accused Olo of cheating them and violating the contract. The two settled afterwards, but it goes to show the business risk of relying on one partner for 20% of revenue.

In summary, given Olo’s vertical knowledge in the industry and its value propositions, I can see growth ahead in the near future. If we consider Olo to aggregators what Shopify is to Amazon, Olo then should take a page out of Shopify’s playbook. Shopify has aggressively forged partnership with Pinterest, Facebook and Walmart to bring sales and visibility to its merchants. That’s what the likes of Amazon, Doordash and UberEats are great at. Consumers know them and they can bring a lot more eyeballs than others. Olo already has solutions to domestic pain points for merchants. Now it may need to also think about how to address the external ones, aka sales.

Did Apple find another goldmine?

A couple of days ago, Apple introduced a host of new services and products in an hour-long event, including a new iPad, a new iMac, upgrade to Apple TV, Podcast+, an update on Apple Card and AirTag. While all of the announcements are all exciting, I want to talk about AirTag today.

The idea of a small accessory using Bluetooth technology that helps users track and find lost or stolen things isn’t new. There are different providers in the market, the most known of which is Tile, which was founded almost 10 years ago. The upcoming AirTag will be very similar to Tile. At the size of a small coat button, AirTag emits an encrypted unique Bluetooth identifier that Apple devices can pick up and relay the location of the AirTag back to the associated Apple ID. If your AirTag is within your Bluetooth range, it will make a sound or haptic when prompted by you from the Find My app. If the AirTag is not within your Bluetooth range, it can tap into the vast network of Apple devices to communicate its location to iCloud, which will, in turn, relay to you where your AirTag is. I wrote about how Find My works.

Even though Tile and AirTag look fairly similar, there are quite a few major points of differentiation. Apple has more than 1.5 billion devices (1 billion iPhones) in circulation. We don’t know how many Tile devices are being used, but it’s unlikely that the number is anywhere close to what Apple can boast. Otherwise, Tile would be the darling of Wall Streets and on the stock market by now. Because there are more Apple devices, the Find My network, as a result, will be more useful and powerful than the Tile Community, in finding lost and stolen things. Two years ago, Techcrunch reported that the US is still the biggest market for Tile. Granted, that might have changed between now and then. In fact, Tile’s website says that its Community is available in 195 countries, but the density of Tile devices in each country is unknown. Hence, if a user travels overseas to another country where Tile isn’t popular and loses his or her luggage, what then? As Apple devices are popular around the world, this advantage should not be discounted as it can be a great incentive for consumers to go with Apple instead of Tile.

True to form, Apple sells its privacy features on AirTag hard. According to Apple, the emission and receipt of the unique Bluetooth identifier is totally encrypted so that no one, not even Apple, can access an AirTag’s location, except for its owner. Also, the Bluetooth identifier is randomized and changed multiple times in a day to avoid persistent tracking. To prevent the scenario where AirTag becomes a weaponized surveillance tool, Apple notifies users when an unknown AirTag is traveling with them. In other words, if someone slips discreetly in your pocket an unknown AirTag not paired with your Apple ID in order to track your movement, the Find My network will let you know with a notification. If the person in question doesn’t have Find My network, aka Android users, AirTag will make a sound letting him or her know the existence of an unwanted AirTag after a period of time. Right now, the default length is 3 days. Furthermore, strangers will not know your identity if they pick up your AirTags. Each AirTag comes with a unique serial number. Only when the owner of an AirTag flags it as lost and willingly wants to share contact details, others won’t be able to know whom that AirTag belongs to. As consumers become increasingly conscious of privacy, these features can play an important role in differentiating AirTag from competition. I am not sure that Tile can offer the same.

Additionally, Find My is a native and pre-installed app on Apple devices; which makes it more accessible than the Tile App for which users have to head to the App Store to download. The deep integration into the Apple ecosystem cannot be discounted either. We have seen Apple make accessory products like Apple Watch and Airpods extraordinary successes before. AirTag is available at $29 apiece or a $99 for a pack of 4. However, consumers will need to shell out more money ($30) for a loop to hold an AirTag. Let’s assume that on average, an AirTag will cost $50. Apple will only need to sell 20 million of these accessories to generate $1 billion in revenue. As mentioned above, the company boasts 1.5 billion devices in the wild. Hence, 20 million doesn’t seem like a tall order. Moreover, Apple can generate more money by selling replaceable batteries that run out every year with everyday use.

Source: Apple

According to Fast Company, an Apple ID can pair with maximum 16 AirTags. As the market for AirTag develops more in the future, it’s possible that we may see a subscription from Apple that provides free battery replacements. Currently, Tile sells a subscription at $3/month or $30/year for the free battery replacements and extended warranty. I don’t see any reason why Apple wouldn’t do the same if the average AirTag user has multiple of this accessory. Another option is to bundle it with their flagship subscription – Apple One.

In summary, AirTag is another example of how Apple knows how to leverage its strength to offer a competitive product in a market where it is a late entry. The potential for AirTag to become another billion product line is there. I look forward to seeing how successful AirTag will be and what applications as well as auxiliary markets (accessories) it will bring about.

Disclaimer: I have a position on Apple in my personal portfolio.

Apple TV+ has the highest ratings among streamers. Walmart vs Amazon. Netflix recorded slower growth but saw 2x growth in FCF

Apple TV+ has the highest IMDB ratings for content

According to a new study, content on Apple TV+, Apple’s exclusive streaming service, receives the highest average ratings on IMDB. There are a couple of caveats here: 1/ this is on average. One size cannot fit all in this streaming area. The study reveals that Apple TV+’s content ranks pretty low in some genres. Hence, if you are a connoisseur of Crime or Fantasy content, the streamer may not be your cup of tea. 2/ Apple TV+ has a significantly smaller library than other streams. As a result, the smaller sample may favor Apple’s streamer.

Focusing on content quality is a smart move from Apple. The likes of Disney+ or Netflix already have a lot of titles to offer viewers. It would take Apple either a long time or plenty off money to acquire the rights to stream titles from other producers. Even then, they still likely wouldn’t come out on top because the other heavyweights aren’t standing still to lose their market share. Plus, I don’t imagine Apple TV+ is a profit center for Apple. At $5/month and restricted to Apple devices or Roku, I don’t think Apple TV+ reaches the scale that enables them to raise prices yet. It is an auxiliary service that makes their bundle Apple One or their devices more attractive and sticky to consumers. Services like Apple Care or iCloud, and their hardware are the drivers of margin and profit. It doesn’t make sense for Apple to try to compete with Netflix on the number of titles while diluting investments on quality. The prospect of Apple TV+, with its much smaller subscriber base, beating Netflix on their own game doesn’t seem likely. Plus, focusing more on quality resonates more with the Apple brand.

Walmart vs Amazon

The battle of these two retail titans is exciting to watch. While Walmart has been trying to improve its 3rd party marketplace & ads platform and grow its fintech segment, Amazon has also had some developments on its own:

Walmart has the advantage of low-cost grocery, a category that is near and dear to every shopper, and a network of stores scattered around the country that can act as their fulfillment centers in addition to the actual dedicated ones. On the other hand, Amazon has a more mature online presence, 3rd party marketplace and ads business. It also has 200 million loyal and, in my opinion, profitable customers in their Prime program. For the past months, each company has tried to close the gap to the other. Walmart launched a Walmart+ service, their answer to Prime, while ramping up their marketplace, including the partnership with Shopify, and ads business. Meanwhile, Amazonzz has invested heavily in last-mile delivery and cashierless stores. Even though it’s tough to match the scale of Walmart in groceries, having smaller stores and no headcount expenses will definitely help Amazon drive down the prices.

Which retailer will come out on top remains to be seen. It’s exhilarating, though, to see each iconic firm expand its capabilities and go out of its comfort zone to stay competitive. If I were a business or strategy professor, this would be one of the cases I bring to classes.

Netflix recorded slower growth but saw 2x growth in FCF

The results of Netflix’s first quarter FY2021 were out today. Revenue stood at $7.2 billion, a 18% YoY growth, while operating income was almost $1.9 billion, up 44% YoY. The quarter closed with almost 208 million paid subscriptions, including 4 million in net additions compared to almost 16 million subscribers in net add a year ago. The company attributed the slow growth in subscribers to the pandemic and a weak slate of titles. While Netflix is still confident in the 2nd half of the fiscal year, it does forecast a relatively flat weekly global net adds till the end of the 2nd quarter.

Netflix's flat forecast in net subscriber adds till Q2 FY2021
Source: Netflix

While a slower subscriber growth isn’t good news to Netflix investors, it doesn’t tell the whole story. First of all, they may actually be right that the pandemic and having no hits this quarter had adverse effects. Second of all, Netflix raised their subscription prices a few months ago; which may also be another contributing factor, especially given the intense competition from other streaming services. HBO premiered two blockbusters: Godzilla vs Kong and The Snyder Cut. Disney Plus had their exclusive Wanda Vision and The Falcon & The Winter Soldier, among other titles.

Additionally and very importantly, Netflix increased its free cash flow by 200%, despite a stunted subscriber growth. The company’s free cash flow in Q1 2021 was $692 million, up from $162 from the same quarter a year ago. In the shareholder letter, Netflix was confident that they would be FCF neutral for FY2021 and that they had no plan to raise debt in the near future. More excitingly, they are beginning to buy back shares this quarter. For the Netflix bulls out there, it’s great news. The company spends $20 billion a year on content, yet it is on track to become FCF positive; which almost no other streamer can replicate. That’s the beauty of operating at the scale that Netflix does. Their content investment is a fixed cost. The more paid subscribers there are, the lower the unit cost for each subscriber will be and the higher margin Netflix can extract. However, for other streamers, they have to invest a lot in content to grow their subscriber base. Since their current pool isn’t big enough, they are likely operating in the red with negative cash flow like Netflix used to. The question then becomes: how long can those streamers sustain that loss while trying to match those billions that Netflix pours in content annually?

Yes, seeing their growth stunted this quarter isn’t great, but it’s just one piece of the puzzle. The FCF piece that Netflix announced today is, in my opinion, equally important. One quick look at notable news outlets that covered Netflix earnings showed one common theme: Netflix’s growth. I mean, it’s not wrong, but I don’t think their headlines tell the whole story

Coverage of Netflix's Q1 FY2021 earnings without mentioning the cash flow story